memorandum to: file nos. s7-07-18, s7-08-18, s7 …...so my name is kara stein, and i am one of five...
TRANSCRIPT
MEMORANDUM
To: File Nos. S7-07-18, S7-08-18, S7-09-18
From: Division of Investment Management, Division of Trading and Markets
Re: Roundtable on September 20, 2018 Regarding Standards of Conduct for Investment Professionals
Date: October 30, 2018
On September 20, 2018, a roundtable at the Reginald F. Lewis Museum in Baltimore, MD was held. Approximately 50 individuals attended. The roundtable was intended to gather information from retail investors who will be directly impacted by the Commission’s rulemaking regarding standards of conduct for investment professionals.
Attached is the entire transcript of the Baltimore, MD roundtable discussions. The discussions at the roundtable were intended to be conversational, and the Chairman, Commissioners, and SEC staff provided summary descriptions of the Commission rulemakings. To the extent that any descriptions contained in the transcript deviate from the Commission’s proposed rule text and rulemaking releases, such descriptions do not supersede the proposed rule text and releases. In this regard, see proposed Form CRS Relationship Summary, Regulation Best Interest, and Interpretation.
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THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
INVESTMENT ADVISER/BROKER-DEALER ROUNDTABLE
YOUR RELATIONSHIP WITH YOUR FINANCIAL PROFESSIONAL
AND THE NEWLY PROPOSED BEST INTEREST RULE
Thursday, September 20, 2018
6:00 p.m.
Reginald F. Lewis Museum
Baltimore, Maryland
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1 PARTICIPANTS:
2
3 COMMISSION PARTICIPANTS:
4 Jay Clayton, Chairman
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6 Kara Stein, Commissioner
7 Robert Jackson, Commissioner
8 Elad Roisman, Commissioner
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10 Lori Schock, Director, SEC Office of Investor Education
11 and Advocacy
12 Sarah ten Siethoff, Associate Director, SEC Division of Investment
13 Management Rulemaking Office
14 Lourdes Gonzalez, Assistant Chief Counsel for Sales Practices,
15 SEC Division of Trading and Markets
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17 AUDIENCE PARTICIPANTS:
18 Audience Participant 1
19 Audience Participant 2
20 Audience Participant 3
21 Audience Participant 4
22 Audience Participant 5
23 Audience Participant 6
24 Audience Participant 7
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1 PARTICIPANTS(CONT.): 2 3 AUDIENCE PARTICIPANTS(CONT.): 4 Audience Participant 8 5 Audience Participant 9 6 Audience Participant 10 7 Audience Participant 11 8 Audience Participant 12 9 Audience Participant 13
10 Audience Participant 14 11 Audience Participant 15 12 Audience Participant 16 13 Audience Participant 17 14 Audience Participant 18 15 Audience Participant 19 16 Audience Participant 20 17 Audience Participant 21 18 Audience Participant 22 19 Audience Participant 23 20 Audience Participant 24 21 Audience Participant 25 22 Audience Participant 26 23 Audience Participant 27 24 Audience Participant 28 25 Audience Participant 29
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1 PARTICIPANTS(CONT.): 2 3 AUDIENCE PARTICIPANTS(CONT.): 4 Audience Participant 30 5 Audience Participant 31 6 Audience Participant 32 7 Audience Participant 33 8 Audience Participant 34 9 Audience Participant 35
10 Audience Participant 36 11 Audience Participant 37 12 Audience Participant 38 13 Audience Participant 39 14 Audience Participant 40 15 Audience Participant 41 16 Audience Participant 42 17 Audience Participant 43 18 Audience Participant 44 19 Audience Participant 45 20 Audience Participant 46 21 Audience Participant 47 22 Audience Participant 48 23 Audience Participant 49 24 Audience Participant 50 25
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1 C O N T E N T S 2
3 PAGE 4
5 Welcome and Opening Remarks 6
7 Roundtable Discussion 14 8
9 Closing Remarks 61 10
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P R O C E E D I N G S
CHAIRMAN CLAYTON: Hello. Welcome, welcome.
I want to say how nice it is to be here. I'm Jay
Clayton, Chairman of the Securities and Exchange Commission,
and I'm very fortunate to be joined by three of my
colleagues who are Commissioners; and I am going to let them
introduce themselves. And then a number of colleagues from
our Staff; and I want to let them introduce themselves.
Then I'm going to come back and do some preliminaries. But
then we really want to get to talking to you.
So with that, I will turn to Commissioner Stein,
and let her introduce herself.
COMMISSIONER STEIN: Awesome. Is this working?
No. I'll just -- awesome.
So my name is Kara Stein, and I am one of five
Commissioners at the Securities and Exchange Commission.
And I just wanted to say a lot of you I know have had a full day
already. So we really appreciate you coming in after work to
talk to us about a very important issue, the standard of
conduct that investment professionals owe to investors like
yourselves.
I also would be remiss if we didn't thank the
Reginald F. Lewis Museum of African American History and
Culture. I think it is very fitting that we are having the
roundtable here, as one of the key values of the center is
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So it's a pleasure to be here this evening, and I
look forward to hearing from you.
CHAIRMAN CLAYTON: Commissioner Jackson.
Thank you, Commissioner Stein.
COMMISSIONER JACKSON: I'm Rob Jackson. I am also
a Commissioner with the SEC. And we're here to hear from
you, so it's really important that we get to the part of the
conversation where we hear from you all. I'm just going to
be very brief.
The reason we're here, and it's very important, is
because everybody in this room is trying to invest their
money in a way that reflects their priorities, their future,
their dream. Whether it's their retirement, education,
whatever it is about your life that you're trying to change,
the reason this is so important, the reason we all care
about it is because we know how much you care about making
sure that you get the kind of advice you need, to make those
things happen for you and your family.
And you are going to hear lots of different
perspectives today, and that's fine. But I want to just
start by saying everybody up here cares about that and cares
about making sure you feel like you have the tools you need
that you're entitled to have as a citizen of this country to
get the advice you need to change your lives. That's what
this is all about.
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to demonstrate ethical behavior. And that is a key component of what we are here to discuss. That is, how we
can help to instill ethical behavior in the market for investment advice.
I'd also like to briefly reflect on the process of creating a rule that governs how professionals should act
when advising you about what to do with your money. At the heart of this rulemaking process is hearing from you, and
that's why we're all here today. After all, this is about your money and what you have at stake, your retirement and
your future. So I think all of us are going to be interested in
knowing what we do right, what can we do better, how can we help you reach your financial goals, what do you expect from
your financial professionals. And, you know, sometimes you're expecting a doctor, but you got a salesperson. You
know, what are your expectations when you go in for help on your investment portfolio?
And what about fees? Shouldn't you know exactly what you're paying for, just like when you're buying a
gallon of milk? So I'm glad that our Chair, Chairman Clayton, is
working hard at this and I hope we can ultimately settle on a smart rule that makes sense, first and foremost, for you
as investors. And that's what we need from you.
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And that's why we're here to hear from you.
Because the perspective that you have when you walk into
that office with that money to try -- to try to make that
decision is the perspective we need to set up the market in
a way that's going to work for you all. So that's why we're
here to hear from all of you tonight. I am delighted to be
here. I appreciate the Lewis Center hosting us, and we look
forward to the conversation.
COMMISSIONER ROISMAN: Hi, I'm Elad Roisman. I'm
also a new Commissioner at the SEC, and I am thrilled to be
here. And I am exceptionally happy that there are so many
of you here to kind of share your views on this important
topic.
Ultimately, what we're trying to find out is, we
put out a rule, and we're trying to see whether what we've
got out there is right, or whether it can be improved, and
how it can be improved. But I really commend the Chairman
and my fellow Commissioners for doing these kind of town
halls. And I think it's critically important that we hear
from folks who will be directly impacted. And some people
just don't make it to Washington. So it's great that you
guys are taking the time, especially after a long day, to be
here with us. And I'm thrilled to be here, and thanks very
much.
CHAIRMAN CLAYTON: Thank you. And, Lori, why
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don't we start with you?
MS. SHOCK: I'm Lori Schock. I am the Director of
the Office of Investor Education and Advocacy. In addition
to maintaining a national outreach program for investor
education, we also have an Office of Investor Assistance.
So complaints and questions, give us a call, send us an
email, we'll take your complaint or question any which way
you want to send it to us.
And we're happy to be here and talk about this
rulemaking, because it does impact investors. And I
appreciate you all taking the time to be here as well.
I do have one housekeeping issue. And that is, we
are not using mics, so please speak up. Also, this is
recorded, so we have a court reporter who is taking people's
comments and all. We will not attribute; that's why you
don't have last names on your tag cards. But we really do
want to have this and have this on the record. Thank you.
MS. GONZALEZ: I'm Lourdes Gonzalez. I have been
working on sales practice issues related to broker-dealers
for a long time. And we just want to make sure that what
we're proposing or the Commission is proposing is right or
how it can be improved upon.
MS. ten SIETHOFF: I'm Sarah ten Siethoff. I'm an
Associate Director in the Division of Investment Management.
And Lourdes and I spent a lot of time working on this
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Last thing is a short lesson in administrative law. My colleagues referenced this. When we make rules like this, we have an obligation to publish them in a proposed form, say, hey, here's what we're thinking, here is why we're thinking it. Give us your feedback on how we can make it better.
The people to my right and about 50 other people worked really hard to get a proposal out. But that's what it is. What is sitting out in front of the public today is a proposal. I'm going to describe it briefly in a second. But it can be improved, and we think this feedback will improve it.
The proposal, in a nutshell, has a couple of parts. It's clear to us that the current standard of conduct that applies to one type of investment professional, a broker-dealer, is not where the reasonable investor would expect it to be. When people deal with a broker-dealer or an investment adviser -- and those are the two types of investment professionals -- what they want to know -- we believe what they want to know is that person is not trying to take advantage of them.
Now, we can phrase it in different ways, and that's one of the things we're working on. But you want to know that the law doesn't allow that person to take advantage of you. In fact, that person has to service you.
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project together, including on this document that you have in front of you.
This is a sample document for a form of a relationship summary, that we put out as part of this proposal for people to get a sense. This is something that's supposed to be for you, to help you figure out what kind of financial professional you want to use. So hopefully we will hear a lot of good feedback from you tonight on how we can make this better. Thanks.
CHAIRMAN CLAYTON: Great, thank you all. Okay, let me get some preliminaries, then we will
get to you guys. So first rule of the road for tonight, if you hear legal jargon and you say, "Hey, I don't know what that means," raise your hand. Because it's our job to try and explain that to you. And that's also a theme here. We want to -- we want to produce a product when we write a rule that puts you in a position where you don't get legal jargon but you get information that makes sense.
To other legal points, this is an official meeting of the Commission under our rules and regulations. That means it's an open meeting. Lori referred to that. It's being recorded. We are going to try and protect your last names, so we use first names, but we have to record it. If you don't want to have something be on the record, I suggest you just be an observer. But we welcome your participation.
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They have obligations to service you. They can't put their interests in front of you. They have to do due diligence.
They have to be capable of offering the advice. A number of factors like that. And I don't think anyone up here thinks
the standard that applies today at law is where it should be. One part of this.
Second part of it is, when you talk to them, when you go and meet with an investment professional,
particularly in the first instance, say you're retiring and you have a 403(b) or a 401(k) and now you're going to be
responsible for that investment and you say, "I want some help." When you go to that person, they need to explain to
you who they are, how they are compensated, what obligations they owe you. Right now, they kind of have to do that, but
we don't feel -- at least I don't feel -- and again I'm speaking for myself here -- I don't feel that that
conversation is required to take place in as clear and candid a way as it should. So that's the second part of it.
The third part of it is we have investment advisers. And there's a lot of law around investment
advisers; and we're trying to clarify what the Commission's view on that law is. Investment advisers are described as
having a fiduciary duty to their clients. That's a very simple term. It's actually somewhat complicated, what it
means, in practice. And we're trying to explain that to the
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1 market as well, and also make it part of what an investment 1 okay.
2 adviser would have to explain to you when you meet them, in 2 AUDIENCE PARTICIPANT: I just want an opinion
3 the first instance. 3 about this, because I don't -- I don't want you to feel
4 So that's what we're trying to do here. I'll stop 4 pressure to give me a definitive answer, because this
5 there. 5 catches a lot of academics off guard. One of the big parts
6 Let me ask if there's any questions about that, 6 I mentioned about education is, I saw from previous meetings
7 and I'm going to kick it to you guys. 7 in Denver, people advocate education with the investors. I
8 (No response.) 8 say education, proper education with the finance
9 CHAIRMAN CLAYTON: Okay, so how I'm going to kick 9 professionals who actually are sticking these things in
10 it to you guys is I would love to hear from people who've 10 people's portfolios saying, hey, look how much Google has
11 had a good or bad experience with an investment professional 11 risen. That rise comes from the exchange of money between
12 and what part of it they thought was good or bad. Go ahead. 12 investors; that does not come from Google, Google dividends,
13 You look ready to tell us, which leads me to believe it 13 because they don't pay dividends.
14 might be bad. 14 And I just want to ask an opinion. I don't need a
15 (Laughter.) 15 definitive answer. Because this catches a lot of people off
16 AUDIENCE PARTICIPANT: I'll tell you, I actually 16 guard. So that's all.
17 worked in finance for over 10 years, hedge funds and also 17 CHAIRMAN CLAYTON: Okay, you caught me off guard.
18 traded, and also worked for a bank. I left the industry 18 (Laughter.)
19 because it was actually bad, but really more for the 19 CHAIRMAN CLAYTON: So look, I'm not going to spend
20 investors we served. 20 too much time on this.
21 And the problem I saw, and why I left the industry 21 What [Audience Participant] is saying is,
22 was, from a fundamental level, I read the transcripts from 22 you know, [Audience Participant] is making a
23 before about the education and communications and conducts 23 point about non-dividend-paying stocks and
24 of advisers. I know the distinctions between these two very 24 stocks that rise in value because people think the company
25 well. I guess the problem that I really saw was there was 25 is growing and is going to pay. He's also saying that when
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1 no real way we could actually deliver what we were 1 you buy a stock, you're planning on selling it someday. 2 promising. Mainly because a lot of the stocks out there, 2 AUDIENCE PARTICIPANT: Correct.
3 Google, Amazon, Tesla, they have no monetary connection to 3 CHAIRMAN CLAYTON: And when a stock doesn't pay a 4 the company. 4 dividend, or an instrument doesn't give a return in cash,
5 I know the textbooks call it an equity instrument, 5 what you really are hoping for is somebody who believes it's 6 but the reality is, these things do not have a monetary 6 worth more than you do at the time you're selling it.
7 connection to the company. They never pay dividends. They 7 AUDIENCE PARTICIPANT: Yes. 8 never share profits with investors. The textbooks call it 8 CHAIRMAN CLAYTON: That's part of investing. I'm
9 an equity instrument but, logically speaking, how can it be 9 not going to get into the sort of thing -- but a point we've 10 an equity instrument if a company never pays these 10 heard from every one of these roundtables we've attended is
11 investors, right? 11 that we're not educating our investors early enough. We're 12 So from a probabilistic standpoint -- because at 12 not educating people in high school and college. And that
13 the end of the day, investors invest to make money. They 13 is coupled with the fact that we're all living longer, God 14 don't actually want to hold Google stocks forever and just 14 willing, and more responsible for our own retirements. And,
15 enjoy the number rise and fall; they've got to get their 15 you know, we're not the Department of Education. But we get 16 money back. And if investors are ultimately contributing 16 it.
17 all the money and the only way they can -- the only 17 Part of what I've learned and I think part of what 18 foreseeable way they can get their money back is by selling 18 my colleagues have learned from this, Lori is in the
19 it to another investor, that's a not a positive sum 19 business of investor education, is we can't do enough of it. 20 situation, I guess you could say. 20 But I'm going to hold off on more esoteric
21 And I just want to -- 21 discussions of intrinsic value. 22 CHAIRMAN CLAYTON: I didn't know we were having 22 AUDIENCE PARTICIPANT: I've thought deeply about
23 finance class -- 23 that, too. But I was only going to add that really the 24 (Laughter.) 24 missed education I see is not really on your end, it's
25 CHAIRMAN CLAYTON: I've got Jackson here, so I'm 25 actually the professors. I've talked to finance professors,
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including CNBC. They say, oh, look how much money you --
that's not money. That is an imaginary value that comes
from the exchange of money, which is fundamentally different
from traceable money people can hide under their mattresses.
So this is -- the real missed education, missed
communication is at the academic and media level, who keep
saying, oh, look at you, you tweeted this, Elon, and now you
just made $2 billion. He didn't make $2 billion. $2
billion doesn't appear out of nowhere. It's a finite thing,
where we have measure and loads and --
CHAIRMAN CLAYTON: A famous investor said, don't
congratulate me for buying a company, congratulate me for
selling it.
Who wants to talk about their experience and how
we could improve it?
AUDIENCE PARTICIPANT: I will. But I'm afraid I'm
going to look like an idiot if I describe it. But I just
wanted to say, last year I retired from Hopkins and I was in
a 403 program. And when I retired, all of a sudden --
you're going to figure out how old I am, too -- all of a
sudden, there's the requirement of a distribution there.
And then I had to decide what to do with all this -- not all
this, but some money that was coming in.
And I started looking at counselors and I didn't
realize how complicated the whole process was. I didn't
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trying to skin you. Or that you're not sitting on an even
playing field where you have to, you know, watch your wallet
the whole time.
You want to know that they have an obligation not
to put their interests ahead of yours. And that's clear to
me. And that wasn't -- that may not be the way the law is
today, which you researched and found out. And that's where
I am. In that conversation, that person can't put their
interests ahead of yours.
But I want to let my -- I will say one more thing.
I think that point is critical in our society. Because it's
a lot of money. It's all the money you had from, you know,
retirement savings when you left your job. That's a pretty
critical point for us to regulate.
AUDIENCE PARTICIPANT: Can I add one quick point
to that? I was in the Maryland legislature, and we always
got bills on making sure financial information was included
in classrooms. We found that most kids can't balance a
checkbook when they graduate from high school. So financial
literacy is a real issue for us, too.
CHAIRMAN CLAYTON: I was helping and failing my
kids with their algebra homework just Sunday afternoon.
Well, I obviously failed your test. But I was shocked that
there were no financial problems. You know, none of the
problems had to deal with balancing your checkbook or
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realize there were two different levels and all this. And I
eventually figured it out and I figured, why couldn't
everybody have the best interests at heart? Why couldn't it
all be the fiduciary standard?
And, I mean, that's what we assume anyway. We
assume everybody there has the best -- it's like a doctor or
a lawyer. You assume when you go to a financial person,
they have your best interest at heart. And I was kind of
surprised that didn't happen. Because now, as you know, as
you just alluded to, more and more people are using those
different mechanisms and there's more money available than
we've had before.
My father had a pension so he didn't have those
kind of decisions. I had to make these decisions and my
family. And I just wanted to know I had the best person
available for that.
And that's why I really appreciate you having this
hearing, by the way.
CHAIRMAN CLAYTON: Let me say, and I don't want to
monopolize the conversation here, we've got lots of smart
people here. But I fundamentally believe that a person in
your position who is going out and seeking advice on a
significant life event like rolling over their 403(b) or
rolling over their 401(k), it's reasonable for you to expect
that that person is not -- how do I say -- they're not
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whatnot. But let me -- there's a lot that you've said that
I want to give my colleagues to react to if they want to. Or we can move on.
COMMISSIONER STEIN: This is a big topic. I mean, at the end of the day, I think we're trying to figure out
maybe how we can change the law. Right? It might be asking Congress to change the law or writing our rules differently.
I think from my perspective, you should be able to trust that adviser and you should know that they're not
directing you to a certain investment because they're going to make more money, you know, off of directing you to that
investment. So I am pretty clear about where I am on that. I think if any of you in the room have had an
experience where if you only had a certain piece of information or you had understood the role of that adviser
better, would it have made a difference? AUDIENCE PARTICIPANT: So I have a 401(k) and a
403(b) from -- that I worked 26 years and put money in. And I worked for the government. And so when I left there,
seven years ago, I called that plan and I said, you know, "Tell me what you think I should do with it, because I'm at
another job and I'll be putting money in and getting 401(k) and 403(b) with another company." And they said, "Oh, just
leave it here.
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1 You know, I didn't know what to ask. Just leave 1 something, a 403(b), you worked for the government or you 2 it here. And so not that that wasn't the best possible 2 worked in education? 3 solution, but they didn't give me like any data to say, 3 AUDIENCE PARTICIPANT: Not in education, no. 4 well, this is why you should leave it here. Or if you did 4 Social services. I worked for state government. 5 X, you might get something, you know, 10 years from now when 5 COMMISSIONER JACKSON: I'm asking because I was a 6 -- you know, I'm 58 years old. When I left there, I was 52 6 teacher before I took this job. I had a 403(b). And when 7 or 51. And, you know, now I'm looking at 70, you know, 7 you leave the job, you know how it is, you leave the job. 8 straight down the barrel. And, you know, I don't know if I 8 It's time to roll it over or keep it or whatever. 9 made the best choice by leaving it there. It's very 9 So they called me up and I said, "What are my 10 complicated. 10 options?" And they said, "Yeah, you can just leave it 11 I did look at your form. And not that these folks 11 here." I said, "Okay, but like, I just got a new job. You 12 needed disciplinary action but I was like curious about 12 don't think I should" -- and they said, "What's your new 13 question 8. You want us to ask them, do you or your firm 13 job?" I said, "Well, I'm an SEC Commissioner. And they 14 have a disciplinary history for what type of conduct? I 14 said, "Oh, shoot." 15 mean, how -- why should they tell me that and is there a 15 CHAIRMAN CLAYTON: So that's the answer. 16 list that I can call? 16 COMMISSIONER JACKSON: You said something I want 17 CHAIRMAN CLAYTON: Very good question. Yes. The 17 to point out, which I think is very important. You said, 18 answer -- so we have lots of tools. We need people to get 18 why should they tell me if they have a bad disciplinary 19 to them more. But let me flip it over to Lori on some of 19 history? They're not allowed to lie to you when they pitch 20 the tools we have to help you. 20 you investment advice. And that's one of the important 21 MS. SHOCK: Investor.gov. That's the -- everyone 21 things about getting questions and putting it on the table 22 has a smartphone here. Put in investor.gov. you can do a 22 for these guys. That's why we're trying to get you to ask 23 background check. And, [Audience Participant], I hope you did a background 23 the questions. Because once you ask them, they can't lie to 24 check when you went with your financial person. 24 you in connection with taking your money. 25 AUDIENCE PARTICIPANT: I will now. 25 And you are entitled to answers to all of these
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1 MS. SHOCK: All right, perfect. You can see if 1 questions, and many more, by the way. Which is why Lori's 2 they've had regulatory issues or if there have been investor 2 right, to go to investor.gov. They have a whole worksheet 3 complaints, how long they've been in the industry, how long 3 there of things you're entitled to ask and get answers to, 4 they've worked with their firm. And they don't know that 4 and you should feel comfortable asking those questions.
5 you're looking at it. It's free. And you can, for either 5 You're entitled to the answers.
6 broker-dealers or an investment adviser, you can just go 6 AUDIENCE PARTICIPANT: I will just say that I
7 through the one place and it will give you the information 7 tried to read the rule. It was over 400 pages long. I was
8 for both type of registrants. Okay? 8 going to print it and bring it and sit it there. So, I
9 CHAIRMAN CLAYTON: But we need to drive more -- 9 mean, this is very complicated stuff. Just want you to
10 one of the things for the form that I'm asking -- 10 know.
11 AUDIENCE PARTICIPANT: That would have been nice 11 AUDIENCE PARTICIPANT: I have a question about the
12 if it was at the end of it. 12 database.
13 CHAIRMAN CLAYTON: Should we require them -- I 13 CHAIRMAN CLAYTON: If you wait, we'll come back to
14 don't -- there are some like Constitutional issues here I've 14 you.
15 got to worry about. But should we require them to put 15 AUDIENCE PARTICIPANT: Okay.
16 investor.gov on there so that people can access these 16 AUDIENCE PARTICIPANT: I'd like to ask the
17 databases that we keep that list bad actors? 17 Commissioners, how informative is the securities arbitration
18 MS. ten SIETHOFF: And the questions in that form 18 process that deals with concrete cases? How informative is
19 are supposed to be so when [Audience Participant] was out shopping for a 19 that to your rulemaking process, or to your enforcement
20 financial professional, to arm you with here are the kinds 20 actions? I think there are some serious glitches that it's
21 of questions I can go through with them and I can ask them 21 not informative. It will not produce enforcement actions
22 all and get confident that they're giving me good answers 22 when it should because of the way the -- the courts defer to
23 that I'm comfortable with. And to help you think of some of 23 the arbitrator's award. You don't have to have a reason to
24 those questions you may not think of otherwise. 24 award. And the best source of information as to how the law
25 COMMISSIONER JACKSON: And you asked -- you said 25 and the practices of a broker-dealer or investment adviser
7 (Pages 22 to 25)
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have on the -- the impact it has on the individual customer
or client is in the concrete case, in the dispute.
So I would like to know, is the Commission looking
at that? Is the Commission trying to open up that avenue of
education for itself?
CHAIRMAN CLAYTON: I'm going to go to Lourdes in a
minute, but I just want to repeat what is a terrific
question. Because words are fine. Like, we can write a
bunch of words. What do they mean in practice? And what we
are trying to do, and it's a great point, is what are the
types of harm that we're trying to prevent?
And what you're saying is, if we knew more about
arbitration cases where people have been wronged, we could
write a better rule. Correct.
Two other areas we're looking at is we have people
who inspect investment advisers, and FINRA has people who
inspect broker-dealers. Trying to arm them with better
tools to inspect for bad behavior is also part of our
rulemaking.
But with that, Lourdes, let me have you respond
directly to the question.
MS. GONZALEZ: So one of the things that we do at
the SEC is we approve the arbitration rules that FINRA
dispute resolution has. We also -- and that's a long
process. It isn't like they file a rule with us and we just
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because brokers have to report on the complaints that they
receive. So we get aggregate data. We can see spikes in
complaints or the nature of complaints or, you know, a
product, a firm, et cetera.
AUDIENCE PARTICIPANT: I hope you're going to look
at the complaint that I made yesterday to the Commission,
which was an egregious case of a broker working himself into
an inheritance of an estate, where the 78-year-old woman
with no spouse or children had dementia and there was a
failure -- and we have been trying to communicate with
FINRA, the Maryland insurance and securities people and the
SEC for over a year. And there was absolutely no
involvement.
I also think, as a former staffer, when I was on
the Staff way back when, when an individual customer came
in, when an investor was vulnerable, there was an immediate
rush to try to get to the bottom of it, to find out, to deal
with the individual customer. I don't see that in the Staff
today, I don't see that in the state securities regulators.
And I also think there has to be better communication
between the different regulators.
In our case, the arbitration panel said that there
was a serious failure of compliance and supervision, but
they did nothing about it. And then the Maryland regulator
said, oh, you had a full opportunity to litigate. So one
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approve it and that's the end of it. You know, we've had
some rules where we've worked with them for years, frankly,
before the rule was approved.
We also review the complaints. So if somebody has
been in arbitration and they don't like the outcome, they
may complain to the SEC. And eventually it will make it to
the -- it goes to the exam folks; eventually it makes it to
my desk or to Lori's group. Makes it to my desk, and we
review it. And really, for programmatic reasons, is the
arbitration system working?
We also meet with the industry a couple times a
year. Petitioners on both sides of arbitration will go to
New York or they will come down to D.C., and we talk to them
about the arbitration program. And so we have -- and we
oversee, most importantly, the FINRA arbitration process.
So examiners will go in there, they will review, you know, a
particular aspect of arbitration, and then they will come to
us in the Division and we'll have a conversation. We'll
review the exam report; we will have a conversation about if
it's working or not.
We have a pretty good sense of the cases in
arbitration that are going through arbitration because of
our interaction with FINRA. We also have quarterly
complaint calls with the SROs, with FINRA and the exchanges,
to find out what the complaints are that are coming in,
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passed off on the other. Nothing got done.
And there has to be better communication and
coordination between the different regulators. And there
has to be a better emphasis on, when an individual investor
comes in, the most important thing is to listen to that
investor and to get to the bottom of his case and his story.
CHAIRMAN CLAYTON: So let me respond to a couple
things. Because I agree with a lot of what you're saying.
So no law or rule or whatever we're doing here is good
unless you can enforce it, right? Again, it's just words on
a page unless you enforce it. And if somebody doesn't
follow what they're supposed to do, if somebody takes
advantage of someone who is, you know, not -- no longer has
their faculties, we should be able to catch them. We have
to catch them. It's not just can we; we should.
So in that regard, we've actually recognized that.
We formed a retail strategy task force recently at the SEC
to go after more of these cases. We also recognize, and
Lori's group is on this, that our investor base has changed.
The demographics are such that we have more older
investors, who are more susceptible to these types of
situations. Sometimes, government is slow to change, but we
recognize this. And I think you're -- that's why we're
here. You're right to say, "Hey, you guys have got to do a
better job in this area."
8 (Pages 26 to 29)
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1 AUDIENCE PARTICIPANT: May I comment just briefly 1 to very clear about exactly what we expect from these 2 on your fiduciary duty standard? 2 finance professionals in order to change the cultural issues 3 CHAIRMAN CLAYTON: I think you have a right to do 3 you're describing, I certainly agree with you. 4 that. 4 CHAIRMAN CLAYTON: Let me -- I'm going to segue 5 AUDIENCE PARTICIPANT: Well, thank you. And I 5 Commissioner Jackson's comment with a little bit of filling 6 view it as a privilege and an opportunity to be here, and I 6 it in. I think there are some places we can be clear, and 7 applaud your work as a former staffer to continue a 7 there are some places you have to have principles. I think 8 wonderful tradition of the Commission for many, many years. 8 that's -- that's how I view the world. You can't have a 9 I don't think the best interest standard really 9 5,000-page rulebook where you have to do this in that
10 means anything. I think when you look at fiduciary duty and 10 situation. 11 you look at changing the mindset of people in the industry 11 One of the areas that it's now clear to me, 12 from sales to professionalism, you have to think in terms of 12 talking to people like you, that we should say, "You can't 13 two aspects. One, promulgate textually clear rules, which 13 do that" -- and again, I'm only speaking for myself -- "You 14 comes from pragmatic experience and learning from 14 can't do that" -- are high-pressure sales contests. 15 experience. And that's why I mentioned the arbitration 15 Somebody is calling you. You just left, you know, you're 16 process as a tremendous, informative tool for rulemaking and 16 rolling over your 401(k), and they say, "You've got to get 17 enforcement. 17 into this," you know. And what's behind that is, if they 18 And then the other aspect of it is, with respect 18 get you into it by September 30, they get a big bonus. 19 to fiduciary duty and concepts such as just and equitable 19 I don't think you can have that kind of 20 principles of trade and the Ezra Weiss shingle theory, these 20 compensation structure and easily say you're putting, you 21 concepts apply in the interstices of the law, where you 21 know -- you're not putting your interests ahead of the 22 don't really have a specific rule that applies. 22 clients'. And so for me, high-pressure, product-specific 23 But what you need to do in those circumstances is 23 sales contests are something we can specifically say, not so 24 to get people to internalize -- people in the industry to 24 much. 25 internalize not only the specific, textually clear standards 25 But if there's other activity that you've
Page 31 Page 33
1 that you promulgate, but the aspirational norms that you 1 experienced that you say, "You know what? That just sat
2 want to develop. 2 with me horribly" or "I didn't like it," tell us about it.
3 And this depends a lot upon the firms; it depends 3 AUDIENCE PARTICIPANT: Four words which I think
4 on the regulators and what they believe their commitment to 4 should be on top of every marketing material and will clear
5 be, and it depends upon the arbitrators. And also the other 5 up a lot of this is we simply say, $34 trillion worth of
6 leg of it, what you're doing tonight is investor education. 6 stocks is equal to zero dollars in reality.
7 And you've just got to keep going with that so people can 7 (Laughter.)
8 make an informed judgment and informed discussion. 8 AUDIENCE PARTICIPANT: One, that's true. Two,
9 CHAIRMAN CLAYTON: Well, I'll just say I think 9 you're going to get pushback on it because that will be a
10 your view is well-founded. 10 little bit too truthful, right?
11 AUDIENCE PARTICIPANT: Thank you, sir. 11 CHAIRMAN CLAYTON: We'll go with a less binary
12 CHAIRMAN CLAYTON: That having people in the 12 outcome.
13 profession who take a professional responsibility is 13 (Laughter.)
14 important. 14 AUDIENCE PARTICIPANT: So we already have
15 I don't know if others have reactions? 15 investor.gov, we have FINRA's Broker Check, we have ADV Part
16 COMMISSIONER JACKSON: I think something else you 16 I, ADV Part II, why do we need a part three? And if we
17 said is very important. Which is, it's important for us to 17 already have all these resources that people don't appear to
18 be clear about what we expect. Because we want people in 18 be utilizing, what makes you think that, all of a sudden,
19 the industry to get a clear message from us about what those 19 this relationship summary is going to change the world and
20 norms are. And I think every one of us understands that. 20 be utilized by people going forward?
21 And the Chairman pointed out -- and he's right, 21 MS. ten SIETHOFF: I can take that one.
22 you know -- the Staff has poured hours and hours and hours 22 CHAIRMAN CLAYTON: I think the relationship
23 into this rule. And the product we have is a very good 23 summary is going to help. I do.
24 starting point. 24 MS. ten SIETHOFF: So on the comparison documents,
25 But I think if what you're saying is that we need 25 there is lots of information out there. Those information
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1 serve a lot of purposes. There are a lot of ADV Part IIs 1 satisfies you, you should probably go somewhere else. You know,
2 that are 150 pages long. 2 the person might not be able to say it's $5. You know, they
3 So I think, per [Audience Participant]'s comment of 3 could say, you know, it's somewhere between $5 and $7, it
4 she looked up our rule and it was 400 pages and she wasn't 4 depends on -- that's an okay answer. But if they say, you
5 going to plow through all of it, and I get that, and a 5 know what, don't worry about it, I can't tell you, or it's
6 link a lot of investors, they're not going to plough through 6 too complicated? Not so much. That's my view.
7 all of it. 7 COMMISSIONER ROISMAN: I think this has been 8 It's there for people who want to read it, it has 8 incredibly helpful, just for me. But I think ultimately 9 a lot of good information. But I think our belief is that 9 some of the things that have been common core is that people 10 we should be doing a better job of giving investors 10 want to have enough information to make an informed 11 something short, simple, so that when 11 decision. And ultimately, the relationship going for 12 [Audience Participant] says, I need a financial 12 financial advice is a daunting one. I think we can all kind 13 professional, what are the three or four things I 13 of acknowledge that. 14 should be focusing on and what are the handful of questions 14 I know from personal experience, the first time I 15 I should be asking and get an answer to? 15 started investing, I wasn't sure what I was doing and I 16 And so I think the ADV has its role and it 16 tried to learn as much as I could. And then, you know, if I 17 provides good information. But it's not for that purpose. 17 go to a financial adviser, I want to kind of have a better 18 And we really think it's important that when people are 18 understanding of what their role will be and what the 19 looking for a professional, that they have useful 19 relationship is. 20 information that helps them ask the right questions and make 20 I think to your point earlier, which is, you know, 21 that decision. 21 are we just inundating people with more information? I 22 So this may not have everything in it that people 22 think this is a good place for us to stop and say, how can 23 want, and that's why we're here. We'd love to how to hear 23 we distill it so people actually understand? And the 24 your feedback about how we can help you better. But we 24 purpose of the rule is saying, you can't put your 25 don't think those documents are designed for that purpose. 25 interests, certain of your interests, ahead of the client's.
Page 35 Page 37
1 MS. GONZALEZ: And, Sarah, we've spent a lot of 1 And I think that's a great starting point to make people 2 time on the questions at the end in trying to figure out are 2 feel comfortable in that conversation and feel more 3 these the right questions or not, Sarah and I, and we're 3 comfortable kind of asking the little bit more uncomfortable 4 curious as to what you think of these questions and what's, 4 questions. 5 in your view, most important or not so important. 5 But I think ultimately what we're trying to find 6 CHAIRMAN CLAYTON: Let me say something else about 6 out from folks here is, would something like this help? Is 7 the form. Here's the thing. It's hard to read any document 7 it clear enough for you to understand the relationship we 8 on its own in this area and feel like you understand what's 8 have? And if not, what other things would you like to know? 9 going on. The form is to accompany a conversation. That's 9 AUDIENCE PARTICIPANT: All right.
10 one of the real benefits of it. It's to drive the kind of 10 I have a question. Well, a comment actually. 11 candid conversation that you want to have with your 11 It seems like the common thing that I'm hearing is 12 investment professional. Hey, how are you getting paid? 12 an understanding of -- first, let me say, I have an 13 You know? Here's my money. I have some money I've saved 13 appreciation for what the SEC does in terms of the 14 for a long time. I'm asking you for your advice. How am I 14 rulemaking and writing that. Let me say that first. 15 paying you for that advice? Tell me about it. Tell me what 15 But I think it would be an advantage to the SEC 16 your incentives are. Tell me what kind of obligations you 16 and the common mom and pop person to have a plain language 17 owe me. And then answer some of these questions. 17 campaign. I mean, this woman here said she -- it's 450 18 One of the questions that I love, and sometimes it 18 pages. Like, I know you guys do a wonderful job. But if I 19 doesn't have a precise answer, sometimes it does, is I have 19 am Jane Doe the consumer, how am I supposed to interpret 20 -- I have $1,000. If I ask you to invest that for me, how 20 those rules and regulations? Thankfully, I'm in a place 21 much of that money is going to work for me and how much is 21 where I can ask. But there are a lot of people who don't 22 going out in fees? You know, I expect to pay somebody for 22 know what to do with their retirement, don't -- I mean, they 23 advice. But I'd like to know how much is going to work for 23 just don't. And they're not going to come to or look for the 24 me and how much is going out in fees. 24 regulatory aspect of things to figure that out. 25 If you can't get an answer to that question that 25 So I really believe very strongly that we should
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1 consider a plain language campaign. At least that's what 1 very disquieting.
2 I'm calling it. But you want people to understand what 2 So if you have a form that everybody gets that,
3 you're giving them. You can give them all the information 3 you know, the investment adviser or broker-dealer or
4 you want but if they don't understand it, then what's the 4 whomever has in there, this is the range of fees no matter
5 point? 5 what we're talking about, I can take this sheet of paper
6 CHAIRMAN CLAYTON: Let me ask you a question. 6 with me when I go to the next person and I can compare, you
7 Because I think after -- this is our seventh, eighth roundtable. 7 know, is the turkey burger worse than the hamburger?
8 This is the fifth one that I've moderated. I can't tell you 8 AUDIENCE PARTICIPANT: Depends on if you put the bleu cheese
9 how right you are. 9 on it.
10 One thing we're thinking about is a video. What 10 (Laughter.)
11 I'd like to know is, if we did -- I don't want it to be too 11 AUDIENCE PARTICIPANT: But it changes
12 long. If things are too long, people don't watch them. But 12 the dynamic, because you have something that you can
13 if we did a three, four, five-minute video -- 13 compare.
14 AUDIENCE PARTICIPANT: Two or three. 14 CHAIRMAN CLAYTON: So I know you are going to have
15 CHAIRMAN CLAYTON: -- two or 15 somebody here who's going to be like, "Yeah."
16 three -- 16 COMMISSIONER STEIN: I've been suggesting that.
17 (Laughter.) 17 (Laughter.)
18 AUDIENCE PARTICIPANT: It's the bid/ask -- 18 CHAIRMAN CLAYTON: And the ability to scrape the
19 CHAIRMAN CLAYTON: But if we did a two-minute 19 data so there are all sorts of great comparisons. We want
20 video and really pushed it out there on the questions you 20 to move toward that.
21 should ask your investment professional, the types of 21 One -- I just want to be honest. One challenge we
22 investment -- we're thinking about doing that. Is that 22 have is there are so many different types of products and
23 something we should put our resources into? 23 services, it's difficult to create one form that captures
24 AUDIENCE PARTICIPANT: I think that could be 24 them all. But my objective over time is to get there, so
25 excellent. And really, you could have a series of videos. 25 that -- but for certain types, we can already do the
Page 39 Page 41
1 You could have snippets. Like this gentleman said, two to 1 comparison. 2 three minutes, depending on what the topic is. Because 2 But I can't tell people, you know, you're not 3 you're not going to capture everything in two to three 3 allowed to price things this way or that way. That's a 4 minutes. But at least if there's a series of topics, people 4 pretty heavy -- but I agree with you and want to drive
5 can go and choose that and listen for those two or three 5 things toward that result.
6 minutes. 6 AUDIENCE PARTICIPANT: Can we keep a database for
7 CHAIRMAN CLAYTON: Thank you. 7 investor losses? Sorry.
8 AUDIENCE PARTICIPANT: One of the things, kind of 8 AUDIENCE PARTICIPANT: So to the point about the
9 going with the plain language campaign, is the forms that 9 different products and things like that, and I absolutely
10 you're talking about creating in this plain language, have 10 understand about the variability and the changes and what
11 something where you can compare when I go from adviser to 11 products at what broker-dealer you're going to get because
12 adviser, professional to professional. 12 of the things they do in the background as well. But
13 One of the things that has just recently happened 13 similar to -- something I understand, the way that lending
14 in the restaurant industry or food is that they put calories 14 happens, there are those boxes across the top, so at least
15 on everything -- to my dismay. 15 it is something. And I'm not suggesting that it will be the
16 (Laughter.) 16 end all, be all, the level of accuracy within whatever
17 AUDIENCE PARTICIPANT: The thing is that you are now making 17 margin of error. But it's something that I can take from
18 an educated choice. So when you are looking at the first thing 18 this broker-dealer and put to another broker-dealer or
19 on the menu versus the last thing on the menu, you can make 19 investment adviser and just have a basis for comparison.
20 that decision. There's an equalizer across the board. 20 Again, the calorie counts are not going to be accurate but
21 So if there are questions -- and also taking into 21 they give you something to look for, too.
22 consideration some cultural engagements, there are some 22 CHAIRMAN CLAYTON: I know we all agree with you.
23 people who are not comfortable asking a person in a 23 And the benefit of that -- I'll let Sarah answer, but the
24 professional position "How much money do you make, how much 24 benefit of that that we've already had in the mutual fund
25 money are you making?" that is -- for many people, that is 25 industry in terms of costs and, hey, this one is this and I
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can compare, and driving the cost down through competition,
I can't tell you how much money that actually puts back in
investors' pockets. It would be -- it would be great to do
that more broadly across the spectrum. Absolutely.
COMMISSIONER JACKSON: And there's another reason,
you're right, if I can just quickly add, Commissioner Stein
has really been pushing very effectively on this for a long
time. And another reason you're right, if you think about
what happened when we forced people to put calories on the
menu, they start thinking about what they're serving. They
asked themselves the question. They have to write down,
here is what we're going to have to tell people this is what
we're feeding them. And they start thinking a little bit
more seriously about the products that they're putting on
the table.
Another benefit also in the mutual fund space and
here, too, I think, would be people have to write down,
here's what we make, here's how we make it. Is that the way
we want to get paid? Is that the kind of product we want to
offer? And that's a very healthy set of questions for
people in the finance space to be asking each other.
So you're absolutely right about this. We agree
with you.
COMMISSIONER STEIN: And we've been -- after the
Wall Street Reform Bill, we were able to do some of that in
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entities that thought, I don't want that revealed. And so I wonder how much the industry does, itself, want to put calories on? I think about [Audience Participant]'s story, [Audience Participant]'s client, the Commissioner, excuse me, who said he didn't know much. And I wonder, most investors don't seem to really even know the basics.
Which is why I went to E-Trade, and I hope this isn't a departure. I thought I knew the risks, bought some Google stock. But, you know, my parents inherited stocks, equities as well from their parents and passed it down. So after the IPO, I'm watching Google, I'm thinking, okay, the stock is flat and years go by and Google is making billions of dollars. I don't think anyone disputes that. My parents had some Coke and JC Penney.
And so I just did some reading and looked deeper into it and I recognized -- and this was mentioned -- I don't actually own a piece of Google. And I bought it from an investor and the only way I can get my money is to sell it to another investor. And there's a term for that, by the way.
And I just wonder, like, my parents don't know that. They're holding all this stock. They don't know that. And I just wonder, what would happen? You talk this is an education event. What would happen if the calories
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the mortgage market, so people could better compare mortgage
products. So I think it's something we should be working
on.
CHAIRMAN CLAYTON: Lori, what do we say about an
educated investor?
MS. SHOCK: It's our best defense against fraud,
it makes informed investment decisions. That's right.
I had a question that was actually said up here to
me about investor.gov. If I may just say that when you do
the background check, if you're looking for a financial
professional, you can do that as well. So that whole fraud
thing, that way you know you're at least not starting off
with a fraudster. So you can do a search within five miles,
10 miles, 25 miles if you don't have a person in mind or
have a name.
And sir, with an injured hand, I'm going to call
on you because that hand has gone up and down and we want to
make sure we get you.
AUDIENCE PARTICIPANT: Thank you.
MS. SHOCK: Yes, sir.
AUDIENCE PARTICIPANT: Do you have the authority
to do that?
(Laughter.)
AUDIENCE PARTICIPANT: So, you know, think about
who opposed that calories information. There were certain
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were disclosed and people realized this actually -- I don't
own a piece of that company; I can only get my money out
through another investor. I don't think anyone knows that;
I didn't.
AUDIENCE PARTICIPANT: Google Class C shares --
these things make $400 billion of market cap, they don't pay
dividends, they don't have voting rights, Google doesn't
back the value. So people are literally trading in an
imaginary Google ticker, where they're not going to get any
money from Google, they're not allowed to have a say. And
they're saying, oh, well, I'll trade it for $1,200. You
know, it's kind of -- I don't even know why that exists,
personally. But this happened way before your watch, but
from a logical level, how on earth did that even come about?
CHAIRMAN CLAYTON: There are more issues than
we're dealing with tonight.
(Laughter.)
CHAIRMAN CLAYTON: Yes.
AUDIENCE PARTICIPANT: I'm a pension trustee for a
small 403(b). And a lot of my friends are retiring. I hope
to do that soon, too. But one of the things that we get
asked -- and you may not be the people who regulate this and
forgive me if I'm incorrect -- I think the broker-dealer
questions are good -- I think the investment adviser questions
are good. What do we tell people who are thinking about going
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1 into annuities? I have an opinion about it but what I -- 1 They decided that they like him. I'm just a little bit
2 what we find is that we have people who are retiring who 2 wary.
3 have managed to amass a right amount of money. They're 3 He has suggested to my parents that he is a
4 scared crapless, they don't know what to do. And somebody 4 conservative adviser and that he's advising them to roll
5 talks them into putting it into an annuity. 5 into my dad's TSP, to roll that into an annuity. It's a
6 Could we have any information about that or where 6 fixed annuity. This is something that I'm like, oh, my
7 would we -- 7 goodness, what are you doing? Because they're 60 and in 30
8 CHAIRMAN CLAYTON: So here -- the question is -- 8 years from now, they're going to be getting half of what
9 and thank you for being a trustee. Because it's a big 9 they think they're getting now. I don't think that they
10 responsibility. 10 realize that. This scares the bejesus out of me because I'm
11 AUDIENCE PARTICIPANT: It's huge. 11 their son, I'm going to be paying for them at some point in
12 CHAIRMAN CLAYTON: No, it is. And sometimes 12 time for their care.
13 thankless. 13 CHAIRMAN CLAYTON: The fact that you feel that
14 So the question is, there are products that can be 14 responsibility is good for them, right?
15 complicated. Let me try and frame it. Some of them are 15 AUDIENCE PARTICIPANT: So I sympathize and I share
16 annuities. In particular, variable annuities. A variable 16 the concern of how can I help them? I'm the financial
17 annuity is you give an insurance company a bunch of money, 17 person in the household. And so they come to me asking
18 they promise you an income stream, I'm going to pay you 18 questions a lot. I have invested some of their money into
19 something a month, and we're going to invest some of your 19 various stocks of various types over the years. But they
20 money in equities, maybe mutual funds, and you might get a 20 come to me for advice. What do I do? Where do I go?
21 return on that. Lori, have I got it right? 21 CHAIRMAN CLAYTON: I'm going to go to Lori,
22 MS. SHOCK: Sounds good. I would say it's a 22 because Lori has tools on how to explain and analyze
23 mutual fund with an insurance wrapper. 23 annuities. And we'll also follow up with you. I want your
24 CHAIRMAN CLAYTON: Sounds good to me. Anyway, you 24 civics lesson, too. But maybe give a quick --
25 get two things, you get an equity investment and what is 25 MS. SHOCK: Sure. And so again, investor.gov. We
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just a promise of payment.
These are complicated instruments and they often
include complicated fees. And one of the questions is, does
a retail investor adequately understand those? I'm pleased
to say that, not as part of this because we can't solve
everything, but we're looking and Sarah's group is looking
closely at putting the calories on the menu for annuities so
people have an ability to --
MS. ten SIETHOFF: We're looking at doing a very
summary type of disclosure document. Again, because people
don't like to read a couple hundred pages to try and piece
through these products, that explains in very simple terms
the key features and risks. So that again, they go in armed
with here are the key risks that I want to ask about and the
key features that I should look at to say is this the right
investment for me. So stay tuned.
CHAIRMAN CLAYTON: Stay tuned.
AUDIENCE PARTICIPANT: Hi, I'm [Audience Participant].
I have two things.
One, I'll start with a story about my parents, and
then I have a civics-oriented question.
So my parents, my dad has recently retired and
they have sought an investment adviser, who they have found.
They went to a library, at a library, and talked with him
afterwards and have since started a relationship with him.
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also have printed brochures on variable annuities. And the
other thing is -- I'm a big believer in diversification.
And so putting everything into one product is never, you
know, sound advice. So that should give some pause.
Make sure you also do this background check that I
talked about. Find out, because the person may be only
registered as an insurance agent, because fixed annuities
are insurance products only. They don't fall under our
jurisdiction. But just -- I think there's a lot more
homework that needs to be done before making that decision.
Also, for those of you who are affiliated with the
federal government, the Thrift Savings Plan has incredibly
low fees. And that's money that stays in your pocket, not
someone else's pocket. So make sure your -- that should be
part of the equation as well.
MS. ten SIETHOFF: And that -- I just want to
recommend, I mean, the materials on variable annuities, it's
just a couple pages long. It tells you all the key risks to
be diligent about and, really, anybody could read it --
AUDIENCE PARTICIPANT: In the current low interest
rate environment, in the future -- it's just something that
makes me cautious.
So moving to the civics part then real fast, I get
brochures or I get -- because I own stock, I get things in
the mail asking me to vote on my stock. I'm happy to vote
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on my stock. I enjoy voting. I vote frequently. I like
voting against compensation for these directors who are paid
billions of dollars -- millions. However, sometimes I don't
feel that I am the best-informed individual to vote on
everything and I would like to assign that to the person who
is my fiduciary, my broker-dealer. However, they are only
willing or they are only able to vote right now on the
auditor ratification. And I am wondering if there is a
possibility -- I would like to assign them more voting
rights if I can because I think that they are probably in a
better position. They know more. That's their job, they
should be informed.
CHAIRMAN CLAYTON: So voting, again, not the
subject for tonight. But, no, you raise it. Voting has
gotten more complicated because many stocks are held through
intermediaries or in funds and whatnot and we, just like we
are looking at the variable annuity disclosure and trying to
bring the calorie count to that, we're looking at voting.
So I don't have a solution for you tonight, but
we're looking at it. Including the question you asked.
AUDIENCE PARTICIPANT: There are investors that
you can educate -- or can't educate, and they don't have the
capability, but they have the money. When does independent
oversight kick in, in respect to an investor who, let's say,
is a senior or impaired or in some way vulnerable? And
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get money back. It's a great service that they're doing.
Don't have to do it but people at FINRA really care.
The second point is there's a new rule for broker-
dealers that want to take advantage of it with respect to
elder financial exploitation. If they believe an elderly
investor is being taken advantage of, they can follow
certain procedures and delay disbursement of the funds for a
certain period of time. It's a brief period of time but
it's like a pause. And the reason for that is because time
is the enemy of the thief. That's the impetus of that rule.
It's kicked in and brokers are -- some brokers are using it.
And the other part of the rule is broker-dealers
are required to try to obtain from a customer a trusted
contact. Before there's a problem, the customer can give a
trusted contact. If there's some issue that you see with
me, you can call my daughter, [Redacted]. So I urge people to
consider that and take advantage of it.
AUDIENCE PARTICIPANT: Two things. First of all,
I think it's good that the form requires disclosure of
disciplinary issues. The problem is, there just isn't
enough resources to police the number of actors out there.
There are those actors that are bad actors that do things
intentionally. And then unfortunately, there's a whole lot
of people out there selling stuff that they really don't
understand what they're selling. And I think that's a
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shouldn't that be part of the rulemaking process, to protect
the vulnerable, the particularly vulnerable investors?
CHAIRMAN CLAYTON: Let me say one thing that we've
done recently. We have some rules that say, hey, when
somebody makes an order, you've got to fill it fast or
you've got to do this fast. Including when somebody says,
hey, sell that for me.
We've changed that rule to say, you know what?
You don't need to do it fast if you have a sense that
there's diminished capacity. Let's have a chance to
investigate that. But we are looking to that. Lourdes?
MS. GONZALEZ: So we have, at the SEC, have worked
for a long time on senior issues. It's funny, I have gone
to a lot of conferences on these issues and everybody has a
story about something going wrong, including in my husband's
family, by the way, so we all feel this deeply, where the --
in our case, it was the hairdresser who took advantage of an
elderly aunt and now owns a house.
But I have two points to make. One is there's a
very good senior help line that is run by a securities
regulator that we oversee, FINRA. If you Google it, I think
it's like Senior Help Line or something like that. It's run
out of the Boca Raton office in Florida. And they are very
good about following up with firms, with the investors, and
really try to help. And they've been able to help investors
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bigger problem.
It's interesting to me that there are a number of
professional designations that include with them an
obligation, an ethical obligation that if you're a member of
that profession, you have an obligation to report
misconduct. We don't have that with registered reps or
people in the securities industry. And that's interesting
to me.
If you're a CFA, you have an ethical obligation to
report CFAs or misconduct that you see. If you're an
attorney, you have ethical obligations to report
inappropriate conduct on the part of another attorney.
So it's impossible for the regulators at the state
or federal level to police everything. And the most
vulnerable people are the individuals. And there's just too
many small salespeople meeting one on one with the most
vulnerable people. And we need another solution to dealing
with that problem.
But secondly, to your point of sale disclosure
form, from my own investor experience, one of the biggest
challenges in understanding the difference between a broker-
dealer and an investment adviser is understanding that the
person sitting across the table from me may make the exact
same recommendation to me and a hundred other customers that
they see. And you can ask them to disclose how much money
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they're making. But what I don't understand as an investor
when I'm sitting there is that this guy always recommends
these products.
So I would add to your -- your disclosure form not
just what -- how much of the $1,000 do I invest, but what do
you typically recommend to an investor like me who comes to
you with $10,000? Is it always these companies' products
and why? Is that really the best product for me or is it
just that your approved product menu only has 50 products on
it and so that's what you're going to recommend to
everybody? Because the investors don't see the BD's
approved product menu.
And if the answer is, "I always recommend these,"
that tells me that I may be sitting across from a registered
rep who sells wrap accounts as opposed to a fiduciary that
is really looking at my personal situation and evaluating it
and making a recommendation.
CHAIRMAN CLAYTON: So I think your comments are
great, and appreciate it. And I want to say that -- I always
have to be careful when I say these things because I can't
-- like I said, I can't write a rule that's 500 pages and
says you have to do X, Y and Z. But to calorie count, and things
that I like -- so, I would like it. And let me be
absolutely clear, I don't know if this can be
required -- I don't know if we can drive
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husband and I have joint accounts and are completely different investors. And I -- we have a financial adviser who I'm happy with, and I am because she asks us that.
My concern on some of these in costs, cost is --clearly, you want the money to work for you and not for someone else. But I had to force my husband to go to a financial adviser because I don't feel comfortable that I'm making the right decisions, and our adviser, we're very happy with her. But my husband just wanted to do the investing himself. And we're now in an account and we did go through all these, what are the fees, where are they going? My husband is an engineer, so he went through all of that.
And I came -- and my feeling was, I don't care what I'm paying within reason. But when I look at the differential, and we looked at sort of like a, you know, standard mutual fund or an index. And I looked at sort of over the last five years what was the increase and what would it have been, versus an advisory account we're in now, and we're paying more for that advisory account but the results are better.
So, you know, it's more -- it's not just the fees. And my concern about the sole focus -- and I know you're not focusing solely on fees, but by doing that of course you want to get the most cost efficient. But cost efficient may
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the behavior this way -- but I would like it if
when you went in to see a broker-dealer or investment
professional, and you had five different types of people.
You had Lourdes, me, somebody who is 25, somebody who is 70,
with different types of profiles, and you said, hey, run
these five profiles through your, you know, recommendation
machine. If what comes out of that is the same thing for
all five of those people, that recommendation machine is not
worth a whole lot, which is what you're saying.
And, you know, one of the things that I think we
should think about when we sort of say, hey, are you
discharging your obligation is that kind of, hey, show me
how you're doing it. Do your policies and procedures -- you
know, lawyers talk about policies and procedures. When we
test them, do they work? I don't know, what does everybody
think about that? You know, there are all sorts of
different types of people. Do you want to pass this through
your procedures? If you come up with the same thing for
everybody, I don't know, it tells me something.
Let me go to people who haven't yet --
AUDIENCE PARTICIPANT: I have a similar comment,
actually, two comments. I think, you know, the questions
generally are good. And maybe this is really the same
comment. You know, sort of, what are your risks? What are
your goals? Are really key, because I can tell you my
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not be the lowest cost.
CHAIRMAN CLAYTON: The lowest cost may not be the
best.
AUDIENCE PARTICIPANT: Right.
CHAIRMAN CLAYTON: That's one of the hard things
you have to deal with.
AUDIENCE PARTICIPANT: And the second question,
really, just dovetails on annuities. And again, my husband
and I are very different. And we are now near retirement.
And so our broker is, you know, saying we actually --
because I did have to pay for my mom in her later years, and
so I'm absolutely fixed on I want to make sure that I have
enough in retirement. And, you know, they'll come back and
the models will say, well, 85 percent chance. I'm like,
that's not good enough for me.
So we're now looking at having -- you know,
looking at, okay, what do you think your monthly expenses
would be, and buying an annuity. And I had to ask about
that because the broker, it's not generally on their menu.
Because they actually said, it's more expensive. I'm like,
well, yeah, it's more expensive but then I'm guaranteed that
I'm not going to run out of that money. So --
CHAIRMAN CLAYTON: As Lori was saying, not
everything but sometimes something in a different type of
product makes sense.
15 (Pages 54 to 57)
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AUDIENCE PARTICIPANT: If I can segue in with
that. You have to find out if the broker-dealer you're
dealing with is captured by a single company. No matter
what you do, he can't sell anything but, say, product A.
Everybody that goes in to him has to buy product from
company A. That's all he can sell. He's not licensed to
sell anything else. Whereas, your independent dealer can
give you more, A, B, C. There again, you have to make sure
he's not pushing you over where he's making his most
commission and you're not getting your benefits.
But that's a big question when you first meet him.
Are you captured with a single company or are you
independent? Can you sell me something different?
COMMISSIONER JACKSON: And it sounded like you had
a second point there. It's especially important and
something we've been thinking about and talking about.
Which is, even if you are independent, there is a menu you can
offer me.
AUDIENCE PARTICIPANT: You have to be sure -- I
can be independent and sell 437 different companies. But if
the first company I was ever with gives me the highest
commission rate, am I always going back to that? Am I
always going back? Is that where I am.
And a lot of times, when you look on the wall
behind your dealer, which companies are giving him most
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advice, getting financial advice is a daunting and
intimidating experience. And for me, as a 25-year-old,
going in and talking to somebody who was way older than me
at 40 was a scary thing, fresh out of school.
And so how -- my question is this. I was going
through this and highlighting things in, you know, what are
the terms I really didn't understand when I was young and
what are the concepts that up until probably fairly recently
I was clueless on? How do we -- how do we help those young
people, the 25-year-old profile, and the 70-year-old
profile, who has been invested in TSP for 45 years? So
that's my question.
CHAIRMAN CLAYTON: No, I think -- look, I
appreciate your comment. It's a common comment that we've
received, which is, hey, step in the right direction. You
know, it's a great -- 75 pages, not so great. Four pages,
some key terms. You know, are we at the calorie count menu?
We're not there.
But what do we do with the tools we have? And
unfortunately, with the obligation in this space to be
fairly precise, because things get pored over by lawyers and
whatnot.
But I think what I've heard loud and clear
throughout all these roundtables is, you know, give us a
video. Hey, Jay, take the risk of not being precise. Try
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awards? Because it's right there. It's right there in your
face. You can see it.
A company that is out of business, Bravo Health,
they're not around anymore. But if you go in there and you
see Bravo, I'm a head salesman for Bravo, I did this for
Bravo, Bravo, Bravo, but I have a shingle out here that says
I can sell for all these other companies but I've got
nothing else on the wall, where am I putting all of my
investment money?
CHAIRMAN CLAYTON: Let me do this. We have
probably about 10 minutes left. I want to go to anybody who
hasn't had a chance to ask a question. Go ahead.
AUDIENCE PARTICIPANT: So I really appreciated the
comments about giving the investor short and simple
information, and I really like the relationship summary.
And as I was reading through this after having retired and
worked with an investment adviser for a number of years and
doing my own investing, I read through, said this is great.
And then I stepped back and remembered what it was like when
I was 25, fresh out of grad school and starting my first job
and trying to figure out how to invest my money.
Looking at the relationship summary, there are a
lot of really fantastic concepts in the summary that,
without that two-minute video, I think a 25-year-old -- and
I think Commissioner Roisman said, going to financial
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to give us some straight talk on how we approach this as
part of this process. And I'm hearing that loud and clear.
I don't know what you guys are --
COMMISSIONER JACKSON: I think that's been the
message throughout. And I think what we've heard tonight
is, look, we need to be able to clearly understand what
we're getting when we go into that office for that
overwhelming moment. And the harder the moment is, the
clearer it needs to be.
And I think you're right, sir, to point out that
it needs to be even clearer and easier for the 25-year-old.
Because God help me if I had made any important financial
decisions when I was 25 years old.
(Laughter.)
CHAIRMAN CLAYTON: I'm going to go here and then I
am going to ask each of my fellow commissioners if they want
to make any closing comment.
AUDIENCE PARTICIPANT: Just a comment -- the
statement about the 25-year old -- I completely agree with
them and I do think that it does need to be a little bit
more clear for someone in that age group. Because I'm
fortunate, where I have a profession that explains that but
most of my peers don't have that. So that could be huge and
tremendous help. And then possibly even suggesting a
roundtable inviting more of that demographic to participate
16 (Pages 58 to 61)
Page 62 Page 64
1 in conversations like this so that you do have that 1 COMMISSIONER STEIN: -- and it was so hard. 2 awareness going forward on how you approach the future. 2 Because it's much harder to write the one page than the 20. 3 CHAIRMAN CLAYTON: Let me ask each of my 3 So sometimes, we're just a little lazy. It's easier to 4 commissioners if they have any final comments, any thoughts? 4 write the 400 pages. So I hear that, too. 5 COMMISSIONER ROISMAN: I think this was incredibly 5 And I think I really liked what you were saying 6 helpful. This is, obviously, my first one and I really 6 about the interstices. Is thinking about -- and we're 7 appreciate kind of the candor and dialogue between us. I 7 talking about this idea of should there be a basic 8 think, you know, ultimately what we're trying to do is 8 relationship that undergirds all of the words that you can 9 produce a rule that helps everyone. And incorporating your 9 count on? You know, we can call it fiduciary duty, we can
10 comments is ultimately the goal, so that we have the best 10 call it a best interest standard. But like your doctor or 11 possible rule. 11 your lawyer or certain other professionals, you know, are we 12 It sounds to me like people want to be able to 12 going to say there's some certain basic professional duty
13 make an informed decision. And part of that is feeling 13 you have to not harm people? And I think that's
14 comfortable in the relationship they have. 14 undergirding all of this, too.
15 COMMISSIONER JACKSON: I agree with Commissioner 15 You know, there are going to be rules. Rules are
16 Roisman. I want to say that I hope you all consider -- one 16 going to change. But I think what's tricky in this area is
17 thing you've heard from us, I hope, is that we understand 17 a lot of people do get intimidated and think that person
18 that this is just the start of this conversation. None of 18 must know because I don't know. And they project on them
19 us up here thinks that we're at a perfect place or that 19 wisdom that they might or might not have. And I think they
20 we're going to a perfect place. We need to continue to hear 20 project upon them that they, of course, care about my best
21 from all of you. 21 interest when they might be trying to win the contest to go
22 So the one thing I would suggest is, if you found 22 to Jamaica next month. So doing whatever we can to make
23 it helpful at all or useful to be here in front of us and 23 that clear, I think.
24 get to ask us questions, keep giving us this feedback. We 24 I think what's been interesting to me is people
25 have on the website places where you can reach out to us, 25 spend a lot more time picking out doctors than they do
Page 63 Page 65
1 let us know what you're hearing, what confuses you, what 1 financial professionals. And it's like what can we do to 2 worries you. Keep being in -- keep talking to us. Because 2 make people understand you need to do just as much research?
3 I think I speak for all of us when I'd say that these 3 That that's not something you just go because they went to 4 conversations make us a lot better at the job of trying to 4 high school with you, right? Or they're nice, right? And
5 figure out how to make these things clear for you all. So 5 you met them at the library. 6 we appreciate the candid feedback and we hope you'll be in 6 So I think that also undergirds -- I'm sort of
7 touch. 7 hearing that, you know, also. 8 COMMISSIONER STEIN: I heard some great things 8 Go ahead.
9 today. Maybe we need a nap. When I'm thinking about the 9 AUDIENCE PARTICIPANT: Two quick things. I wanted 10 25-year-olds -- I have a 14-year-old who only uses her phone 10 to ask you how, because you made a point on this, how driven
11 and, you know, a shorter burst of attention than the two to 11 do you think the compensation is in terms of how it affects 12 three minutes we were talking about for the video. But can 12 the professionalism and the practices of the investment
13 we provide information in a variety of formats for folks 13 adviser and broker? 14 from a variety of backgrounds? And it might be can we 14 And then the second thing I wanted to suggest is,
15 incorporate some of the tools we already have, like our 15 I'm a lawyer. I'm an officer of the court. And that means 16 investor.gov in some form, you know, maybe on the bottom of 16 that not only am I an officer of the court in the court but
17 that relationship summary. Here are other, you know, places 17 I take the law with me outside. And I think you have to 18 you can go for information. 18 have a concept so the financial service professional could
19 And I also -- I like what we were talking about on 19 feel that he's a very important component in terms of our 20 the plain language, you know, issue. And I think it's 20 economy, whether he's in one firm or another firm or he's an
21 always a problem for government and lawyers. We all, 21 adviser or a broker, et cetera, et cetera. And that's the 22 actually, happen to be lawyers. And I remember the first 22 base to launch professionalism.
23 time I -- someone asked me to write something on one page 23 COMMISSIONER STEIN: And I'll just quickly -- I 24 and I was used to writing things on 20 pages -- 24 think it varies from person to person, right? So that's
25 (Laughter.) 25 hard to answer. If someone is a broker-dealer and they
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treat you with the utmost respect and always put your needs,
you know, ahead of theirs. And you could have an investment
adviser who is also just trying to make a lot of money,
right? So I think it's -- you know, this is a -- this goes
back. And you could do that with lawyers and doctors, too,
right? It's that same issue.
But I think part of this is how do we give you
some of the information you need to do that research and
find that person who is going to help you make pretty major
decisions about your nest egg or your life savings? And it
might not just be this relationship summary. If you think
of some good ideas about what you wish was out there, write
us. Write the commissioners. We would love to hear your
ideas about what would help you.
MS. ten SIETHOFF: Actually, can I have one quick
plug on that point from Commissioner Stein? I think each of
you got a little card, a little like postcard size thing
that has the website address. We've done a Tell Us page on
the website, and that, you can go -- for those who didn't
get a comment in here that they would like to share, there's
a little web-fillable form so you can go in, type in your
feedback, click submit and it goes straight to us. So that
has the form for this project. It has it for another
investor experience project we're working on for mutual funds
and those kinds of disclosures. When we do our variable
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Do we need to have more in this kind of trusted adviser,
trusted friend category? Do we need to do more, you know,
at the broker-dealer, investment adviser level so that
people can take a pause? Because we are seeing more elder
fraud. On our enforcement side, do we need to do more? But
it all has informed, you know, what we're trying to get to
here.
I will leave you with some positives. I've been
fortunate enough to do this kind of thing all over the
world. We do have about the best thing going here in
America in terms of capital generation and participation. I
would like, as Chairman, for participation to become broader
and less expensive and better advised. Because we're going
to need it if we're all saving for our own retirements.
And with that, I'll just say, thank you very much.
Thanks to the Reginald Lewis Center for having us.
(Applause.)
CHAIRMAN CLAYTON: Thank you. Thank you all.
(Whereupon, at 7:27 p.m., the meeting was
concluded.)
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annuity summary document, it will have one for that. So
this is a great page if you guys can keep that in mind. You
can keep giving us feedback.
CHAIRMAN CLAYTON: Let me just see if, Lori or
Lourdes, any final comments?
MS. SHOCK: I appreciate you taking the time to be
here. We really do thank you.
CHAIRMAN CLAYTON: Let me just try and wrap up and
say how much we all appreciate this feedback. This has
mattered, okay? My thoughts, and I know my colleagues'
thoughts, on how we're going to go forward, and to
Commissioner Stein's comments, you know, this is -- what
we're doing here is not the end. Markets change,
demographics change, people change. We're not going to get
it perfect. We're going to keep looking at it. This is
important.
But what we have heard has changed our approach,
okay? We talked about the video tonight. We understand
that the forms, the communication has to be not for somebody
who has been investing for 10, 15, 20 years but for somebody
who is getting into the game.
We've learned through this process that there are
certain critical times when you're rolling over from when
you have a trustee to when you don't. You know, when you're
getting older and, you know, what other things can we do?
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